CalPERS's sees 5.8 pct return with new allocation; below 7 pct goal

SAN FRANCISCO Feb 7 (Reuters) - California Public
Employees' Retirement System expects a 5.8 percent annual
investment return under its new portfolio asset allocation,
significantly lower than the fund's assumed rate of return of 7
percent by 2020.

The reduced expectation, disclosed late Monday in documents
from the largest U.S. public pension fund, is based on a
lower-risk, lower-return asset allocation adopted by CalPERS in
September and announced in December.

CalPERS' caution mirrors outlooks from public pension funds
across the United States as they try to grapple with investment
forecasts of slow market growth over the next decade.

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The new CalPERS allocation reduces the portfolio's more
volatile stock and private equity sectors and increases
allocations of more stable investments such as real estate and
infrastructure. The board expects to review the
allocation again in 2018.

In December, CalPERS staff said the fund's 10-year expected
return was 6.2 percent. They expected annual returns to jump to
7.83 percent in the decades to follow. As a result, the fund's
long-term average would more closely align with CalPERS's new
discount rate, which the board voted in December to lower from
7.5 percent to 7 percent by 2020.

CalPERS spokeswoman Megan White told Reuters in an email on
Tuesday that the 6.2 percent expectation is "more reflective of
the desired allocation, and what we expect will emerge from the
[asset liability management] meetings over the coming year."

Pension analysts are skeptical that funds can keep
generating higher returns in the long run. Most funds are cash
negative, meaning they are now paying out more money to retirees
than they collect from current workers and employers. Some
funds, including CalPERS, say they expect higher investment
returns in the decades to follow.

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"It requires a rosy view of the future to assume a long-run
return of 7 percent while expecting to earn only 5.8 percent in
the first 10 years," said Don Boyd, fiscal studies director at
the Rockefeller Institute of Government.

But the alternative, said Boyd, "would require raising
government contributions by even more than they have increased
already, undoubtedly an unpopular and difficult move."
(Reporting by Robin Respaut; Editing by Daniel Bases and Andrew
Hay)